What's your pricing strategy like? While big companies have entire departments dedicated to price optimization, many small-business owners rely on their own judgment or trial and error. Does this mean you're condemned with prices that are too high or too low? Absolutely not! You just need a short lesson on consumer psychology and the power behind one of the more successful pricing strategies based on human behavior called "price anchoring."
What Is Anchoring?
Anchoring is just one example of cognitive bias. Cognitive bias is an important area of psychological study first identified in the early 1970s. It's defined as a “pattern of deviation in judgment that occurs in particular situations.” Basically cognitive bias occurs when people use subjective information that may be irrelevant, inaccurate or inappropriate to reach a conclusion about something.
With anchoring, people tend to put too much emphasis on the first piece of information given, and this skews their thinking about everything else they observe afterward. Anchoring is such a powerful force that even after being told about anchoring, people still can’t break its effect on the mind.
MSRP's Play on Pricing
The Manufacturer Suggested Retail Price (MSRP) is something that we're all familiar with. Here’s a challenge: Find a single example anywhere in the country of a store selling a product above its MSRP. After all, if the price is merely a suggestion, stores don’t have to abide by it. The true purpose behind presenting an MSRP is to establish a high price anchor in the minds of consumers so they feel the actual store price is a good deal.
While psychologists spend their time studying the effects of anchoring, entrepreneurs have put this phenomenon to good use by applying it to their pricing strategies. Because of anchoring, the first price that buyers see will serve as the main reference point for all other prices set by a business. You have to make it count.
How to Use Anchoring
Let’s say I’m selling a consulting package priced at $500 for three hours of work. I know that some buyers may not feel comfortable spending that much with me, so I offer an introductory package of a mini-consulting session for only $99. If I start out offering the low-priced mini-session, that will serve as the “anchor” in the minds of buyers. Subsequently showing the $500 regular session price will make it appear obscenely overpriced, since “I’m a $99 guy.”
How do I deal with this? I start out presenting a “deluxe” consulting package for $5,000. That serves as my new anchor in the mind of buyers. Afterward, I present the regular $500 session and the $99 mini-session. With a new anchor set, the regularly priced session—what I really aim to sell—will appear as an absolute bargain; the $99 mini-session will feel like a gift.
Test it out and see for yourself how price anchoring can work in your favor. (For more information on price anchoring, read Predictably Irrational by renowned psychologist and behavioral economist Dan Ariely.)
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